EU, IMF say Ireland has passed 1st bailout test

DUBLIN 
Ireland is pursuing an aggressive plan to bolster its banks, slash its deficits and pull the Irish out of one of the world's worst financial crises, international experts declared Friday as they approved the next phase of Ireland's global bailout.

Negotiators from the European Union, European Central Bank and International Monetary Fund said Ireland can receive the next euro4.5 billion ($6.48 billion dollars) in the credit line it negotiated in November. And they authorized Ireland to pump euro24 billion into its debt-struck banks by the end of July in a dramatic bid to make them crisis-proof and spur investors to resume normal lending.

IMF executive Ajai Chopra, who oversaw November's deal for a potential euro67.5 billion ($98 billion) credit line for Ireland, said all the experts - who spent the past week testing whether Ireland was meeting its end of the bargain - said the month-old government of Prime Minister Enda Kenny was moving decisively to restore investor confidence in its banks.

Chopra said the new government was "moving forward on banking reform in a very resolute way. Ireland is emerging from one of the deepest crises ever, but the way forward is clear."

He, European Central Bank official Klaus Masuch and Istvan Szekely, director general of economic and financial affairs at the European Commission, agreed at a joint press conference that Ireland's published March 31 stress tests on four Dublin banks were rigorous in setting euro24 billion as the new upper limit to guarantee their solvency. Ireland has already injected euro46 billion into its banks, a burden that wrecked the nation's credit rating and forced it to negotiate November's rescue loans.

Chopra said Kenny's government, elected Feb. 25 and formed March 9, has "moved very quickly after taking office in devising a strategy based on the stress tests. ... In our view Ireland has a clear plan and progress is being made."

Masuch rejected criticisms that other European countries, and the Frankfurt-based ECB in particular, were forcing Ireland's taxpayers to cover bank losses that should be borne instead by senior bondholders. Those investors - chiefly British, German and American banks - are being repaid in full.

"In our view burden-sharing on the senior bondholders would have been risky for Ireland. It would have undermined confidence in the Irish banking sector. You have just achieved a major boost in confidence," he said, referring to investors' mildly positive response to the latest Irish stress tests.

Masuch added that the European Central Bank was directly providing or underwriting more than euro130 billion in short-term loans "at very low rates" to Irish banks, aid that enables them to stay open and dispense money to customers.

"These loans are not available on the market," he said.

As part of the past week's haggling, the financiers did offer concessions sought by Kenny's government to reverse elements of the November package. They pledged backing for an ill-defined program to create jobs - desperately needed in a nation with a 14.6 percent unemployment rate, second-highest in the 27-nation EU.

Finance Minister Michael Noonan said the jobs plan would be unveiled in May and would be "revenue neutral" - meaning it won't increase the deficit. He declined to say how much the program would cost or where compensating cuts would occur.

The European and IMF officials also accepted the government's demand to restore Ireland's unusually high minimum wage. This will take the hourly rate back up to euro8.65 ($12.55), second-highest in Europe next to Luxembourg, following the previous government's decision to cut it by euro1 ($1.45) to euro7.65 ($11.10). The move affects about 60,000 members of Ireland's 1.8 million workers.

Ireland simultaneously will cut in half the tax it makes employers pay for each employee earning minimum wage. That measure was designed to ensure that the pay raise won't raise business costs. Again, Noonan declined to say how Ireland would compensate for the reduced tax take.

The bailout negotiators downplayed an apparent divergence in the economic forecasts used in November's bailout deal versus worse figures now being forecast for Ireland.

While the agreement five months ago anticipated 2011 growth of 0.9 percent and a deficit of 9.4 percent, the IMF this week said growth of 0.5 percent and a deficit of 10.5 percent was now probable.

"The data are volatile. These (two) forecasts are actually quite close, so I would not read too much into the difference," Chopra said.

Economists sounded more skeptical about Irish plans to raise the minimum wage and lower employers' tax burden on those workers - while simultaneously meeting the EU-IMF goal of reducing the deficit to 3 percent of Ireland's gross domestic product by 2015.

"The Irish government hasn't explained where that money's going to come from," said Gregory Connor, finance professor at the National University of Ireland at Maynooth. He said the lower tax on minimum-wage workers means "there has to be a spending decline or tax increase somewhere else."

Connor said few expect Ireland to achieve the goal of reducing its deficit to 3 percent by 2015 - but the country was succeeding in showing that it's doing its best.

"Most economists and the troika (EU, ECB and IMF) members as well as the Irish government agree that goal is not really feasible. The IMF is forecasting it that won't even happen by 2016, but the attempt is important," he said.

Before the latest European and IMF reassurances on Ireland, one of the big three credit-rating agencies cut its grade on Ireland citing the risk of lower-than-expected growth, higher unemployment and future banking shocks.

Moody's dropped Ireland two notches to Baa3, one grade above junk-bond status - and kept the country on a negative watch for a potential further downgrade.

The other two agencies are less pessimistic.

Fitch on Thursday said it was keeping Ireland's score at BBB-plus, three grades above junk, with a negative outlook.

Standard & Poor's on April 1 downgraded Ireland one notch to BBB-plus but raised its outlook to stable. S&P argued that Ireland's strong export sector means it is better placed to rebound than Greece, the first eurozone member to take a bailout, and Portugal, which is currently negotiating one.